(Reuters) – A vast criminal fraud involving tax on Hungary’s basic food products has all but wiped out food industry profits and could blow a hole in the country’s precarious public finances, leading agribusinesses said.

U.S. commodities firm Bunge Ltd. (BG.N) estimates that tax fraud linked to the sale of goods such as edible oils, sugar, coffee and meat is worth up to 1 billion euros ($1.25 billion) a year, and said the authorities must do more to combat it.

“Hungary is one of the main locations for this type of VAT fraud at the moment,” Buff Greebe, Bunge’s director of food in the Danube region, told Reuters.

He said fraudsters were attracted by Hungary’s 27 percent value-added tax (VAT) on most food products – the highest level in the European Union – which was introduced this year as part of efforts to cut the country’s large public debts.

“The incentive is huge, and the food industry has to work with the Hungarian government to stamp it out,” Greebe said.

EU data shows many member states have a VAT rate almost half that of Hungary – 21 apply a rate of less than 15 percent for certain foodstuffs – making the illegal trade extremely profitable.

At the heart of the scam lies forged official paperwork which allows an underground network of small firms, many of them operated by criminal gangs, to flourish.

Bunge says it has little direct evidence of who is behind the fraud, which is in danger of putting out of business a swathe of legitimate companies in Hungary’s food sector.

Auditors say a common approach is to import goods from other EU members without paying import VAT, and sell the products on to retailers via a series of buffer companies, adding VAT for each transaction and pocketing the difference.

EU police agency Europol estimates that 100 billion euros is lost to VAT fraud in the European Union each year. Losses in Hungary have been put at as much as 5 billion euros a year, or about 10 percent of the country’s total public expenditure.

Andrea Aszalos, criminal affairs spokeswoman of the Hungarian tax authority, said investigators were getting better at identifying the fraudsters.

“As (our) systems uncover one risky company after another, the financial investigators of the tax authority are becoming more efficient as well,” she said.

PROFITS DRYING UP

Bunge has teamed up with one of Hungary’s largest agrifood groups, Bonafarm, to highlight the scale of the fraud and press the government to find an effective solution.

“This is not a new phenomenon. This has existed ever since the inception of VAT,” said Bonafarm owner Sandor Csanyi, who also heads OTP Bank OTPB.BU, central Europe’s biggest independent lender.

“But the bigger the difference between the Hungarian VAT rate and the VAT rates of neighboring countries, the stronger the incentive to cheat and seize markets share,” he said.

Based on analysis carried out by consultants Ernst & Young, the firms are calling for the VAT rate on basic food stuffs to be cut to below 10 percent. The analysis, seen by Reuters, looked at VAT fraud in Hungary’s edible oil sector, where Bunge is the top supplier.

Other types of fraud involve buying goods in Hungary and exporting them on paper while applying for a VAT refund. The products remain in the country, however, and are sold with VAT.

“The fraud relies on forged paperwork, and we have warned the different operators in the food chain – suppliers and retailers – to look out for such falsified documents so as not to be considered complicit,” Bunge’s Greebe said.

Fraud usually involves smaller brands known as “b-brands”, which increased their share of the Hungarian edible oils market from 10 percent to 42 percent in the last two years, Bunge said.

“In our case, if we compare 2009 with where we are today, we lost about 25 percent of our volume, and we lost 85 percent of our profitability in the Hungarian domestic market,” Greebe said. As a result, the company could discontinue some of its operations in the country, he said.

Bunge, which had worldwide revenue of $13.4 billion in the first quarter of 2012, now plans to ask Ernst & Young to carry out a similar assessment for all basic food goods in Hungary.

Hungary’s tax authorities told Reuters they had begun a series of investigations, and had uncovered tax fraud worth 375 million euros last year, the vast majority of which involved VAT fraud. Critics say the true figure is much higher.

Parliament has passed a bill to reverse the liability for VAT payments on some basic food commodities from the seller to the buyer from July this year. But Bunge and Bonafarm said most fraud involves the final products, not raw materials such as oilseeds, and so will be ineffective.

Instead the firms want VAT rates on basic foods cut to below 10 percent, arguing it would remove the main incentive for fraud and could increase tax receipts thanks to higher compliance.

That is a sensitive matter in a country that is on the point of resuming negotiations soon with the Commission and the International Monetary Fund on a multi-billion euro loan to help shore up the country’s finances and cut borrowing costs.

($1 = 0.8 euros)

(Additional reporting by Gergely Szakacs and Krisztina Than in Budapest; editing by Jon Boyle)

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When high risk indirect tax areas and lowest performing VAT processes - that have a direct impact on the company's VAT objectives - have been identified, the next step is to measure the performance in term of effectiveness and efficiency of each of these processes:"Measure the magnitude of that problem, determine why the problem exists, and generat […]

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